If the Olympics handed out medals for economic performance, Australia’s surely would be golden after 25 straight years of growth. What lessons might the land Down Under and the rest of the region learn from this record winning streak?
The record was officially confirmed on September 7, with the release of June quarter gross domestic product (GDP) data showing a quarterly gain of 0.5 percent and an annualized rise of 3.3 percent for the world’s 12th largest economy.
As the Washington Post noted, “The last time Australia had a recession, the Clintons had never run for president, Donald Trump had never had a business go bankrupt, and the Soviet Union was still a country.”
Although the Netherlands still holds the official record winning streak, having avoided recession from 1981 to 2008, the U.S. daily pointed out that Australia is now running the Dutch very close.
Australian Treasurer Scott Morrison said the nation’s economy “is growing faster than every G7 economy, well over twice as fast as the United States and Canada and well above the OECD average.”
The treasurer pointed to improved household consumption, public and dwelling investment spending, “more than offsetting the continued and expected decline in resources investment” following the end of the nation’s China-driven mining boom.
However, he also noted the nation’s terms of trade – the ratio of export prices compared to imports – were 34 percent below their peak, remaining at 10-year lows, along with sluggish wages and nominal GDP growth.
“It is simply not enough to presume our exceptional run of growth will continue or that another unprecedented boost in commodity prices will alleviate our budgetary constraints,” Morrison warned.
Yet with no recession Down Under since 1991, the Sydney Morning Herald’s Ross Gittins said the other Group of 20 economies would “love to have our troubles.”
“…If economic management was an Olympic event, we would have won gold at Rio and at several Games before that,” the economics writer said.
Gittins attributed the record winning streak largely to “the good management of Aussie econocrats,” including successive governors at the nation’s central bank, which was handed control over interest rates early in the 25 year period.
“When our retiring Reserve Bank governor Glenn Stevens decides to say something at international meetings of central bank governors, the others stop fiddling with their phones and listen,” Gittins said.
However, the Washington Post and other commentators have pointed to the benefits of China’s unprecedented boom, which triggered a surge in demand for Australia’s resources, causing a surge in business investment and exports which has only recently begun to slow in response to weaker prices.
China’s rapid surge up the economic rankings to become the world’s second-biggest economy saw it overtake Japan as Australia’s top trading partner with around A$156 billion in two-way trade in 2015, more than double that of second-ranked Japan.
Fortunately for Australia, China’s rise occurred at the same time the developed world was hit by the 2008 global financial crisis. While other nations entered the crisis with high government debt and budget deficits, Australia had the luxury of a strong budget position and relatively high interest rates, giving Canberra plenty of policy tools to boost demand.
In January 2008, the RBA’s official cash rate was 6.75 percent, given plenty of scope for rate cuts, while gross government debt was a relatively paltry A$55 billion compared to its current A$415 billion.
The Washington Post’s Matt O’Brien attributes the success of Australia’s central bank to its policy of having a 2 to 3 percent inflation target “averaged over the business cycle” rather than as an annual target.
“That means mistakes aren’t something it forgets but rather tries to fix. The result is that interest rates have been much higher in Australia than in almost any other rich country,” O’Brien suggests.
Australia has also benefited from population growth, assisted by its liberal policy on immigration and government childcare support and other assistance, including the “new baby bonus.” According to the Australian Bureau of Statistics, the nation’s population grew at an annual rate of 1.5 percent in the 10 years through June 2012 and is expected to grow from its current 24 million to reach up to 48 million by 2061 and 70 million by the turn of the century.
While population growth “isn’t a cure-all” for an economy, the Economist points to Japan’s example of what happens when it goes backwards: “Per capita incomes have risen only very slowly, government debt is enormous, households are heavy savers, and deflation is endemic.”
Can Australia’s luck hold? With official interest rates now approaching zero and the government budget back in deficit, some suggest a marked slowdown in China or the end of the housing boom in Sydney and Melbourne could end the nation’s winning streak.
“I think the risk of a recession is higher than most people would price it,” economist Stephen Anthony told Fairfax Media in early 2016. “Most people are talking about a less than 30 percent chance this year. I think it is higher.”
Economist Saul Eslake suggests the government could still stave off the threat of a recession through increased spending, as it did with direct cash payments to consumers when the GFC hit.
“If needed, we should do what we did in 2008 — go early, go hard and go households,” he said.
“The best option is too much rather than too little. If you do too much you can wind it back later. If you do too little it won’t work, and you will have undermined the credibility of any attempts to do more.”
Economics commentator Alan Kohler considers the effects of the mining boom will make it “almost impossible for Australia to have a recession for at least five years, probably 10,” meaning the Lucky Country could still have a shot at the Dutch record.
“Australia’s colossal mining investment boom, which involved two years of A$24 billion per quarter of capital expenditure for resources exports, is well and truly over, but it will definitely result in net exports contributing at least 2 percentage points per annum to real GDP growth for 15-20 years,” he wrote in the Australian.
“So for Australia to have a recession, the domestic economy would need to shrink by more than that much. It’s simply not going to happen.”
Kohler said Australian Prime Minister Malcolm Turnbull could help extend the current economic sunshine by “borrowing off-budget at the current super-low interest rates” to fund extra infrastructure investment. Another method could be through improving productivity growth, with the Turnbull government having recently launched five-yearly inquiries into productivity performance as “the number one driver of future income growth.”
For the rest of the region, the lessons appear to be a mixture of having proactive economic policies, the blessing of natural resources and an open-door policy to trade and immigration, the latter of which still faces political hurdles in aging Asia. In the meantime though, Australians will be hoping the Lucky Country’s luck holds a while longer.